Estate Planning in 2022

After a year of speculation, 2022 begins with no new federal estate and gift tax legislation. The significant changes to federal estate and gift tax laws were not implemented by new legislation. Those changes included a substantial reduction in the estate and gift tax exemption among altered tax treatment for grantor trusts and even a proposal to eliminate the different tax treatment of grantor trusts and elimination of step-up in basis for assets at death.

Keep in mind that the current estate tax exemption levels will expire after 2025, even without legislation. After 2025, the federal estate and gift tax exemption will be cut from more than $12,000,000 to $5,000,000 per individual (plus an inflation adjustment between 2018 and 2025).

Despite all of the lurking uncertainty, some positive developments for taxpayers beginning in 2022. They include:

  1. Increase in the Annual Gift Tax Exclusion. Due to an adjustment for inflation, annual tax-free gifts by an individual in 2022 increase to $16,000 per gift recipient and $32,000 by a married couple.
  2. Increase in the Federal Estate and Gift Tax Exemption. The new federal estate and gift tax exemption beginning for 2022 increases to $12,060,000 per person due to the inflation adjustment.
  3. Required Minimum Distributions (RMD) From Qualified Retirement Plans and IRAs. Changes in the life expectancy tables will result in lower required annual distributions from qualified retirement plans and IRAs in 2022. This benefits taxpayers because the lower distribution will result in less taxable income and helps to continue to preserve and grow the principal of the account under favorable market conditions.
  4. High earners and Roth IRA conversions. Since the proposals to limit Roth IRA conversions have not been enacted, the loophole known as a “back door” Roth IRA has not yet been eliminated. Using this technique, high earners who are otherwise barred from contributions to a Roth IRA and who do not have a traditional IRA may use after-tax money and establish a traditional IRA, and then immediately convert to a Roth IRA with no or minimal tax consequences. It’s uncertain if future legislation barring this technique will be retroactive to January 1 or some other date. For those considering this planning, completing it sooner rather than later may be beneficial.

Remember 2025 is only 3 years away and the IRS has a 3 year look back on gifts.  We have seen an increase in clients having their children create asset protection trusts and taking advantage of the historically high gift tax exemptions while they still exist.  If your family has assets that will appreciate to more than 5 million per spouse, you may consider transferring some assets to the children prior to the 2025 estate tax exemption adjustment.  Contact a Jacksonville Estate Planning Lawyer to discuss your situation and what options make sense.

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